Massive drops in US equity indices wiped away four days of gains as the US inflation report showed the annual core inflation jumped from 5.9% to 6.3% (6.2% expected). This was the biggest increase since March this year. DJ dropped almost 4% and Nasdaq 5.7%. The greenback rallied 1.5% and pushed the commodity currencies into a slide with the commodity currencies AUD (-2.42%) and NZD (-2.26%) taking most of the beating. Given the size of the reaction in stocks and the fact that the Fed Funds futures are pricing in only a 0.75% rate hike next week, we have to ask whether the stock markets have overreacted. I guess, the time will but often massive down moves like this signal more downside for the coming few days (at least). This doesn’t rule out intraday rallies though and as usual, the rule isn’t without the usual exceptions so let’s trade the price momentum as it plays out. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
DJ – Dow trades near the September 7th low. The nearest key price levels are 30973, 31197, 31451 and 31587. A decisive break above the 31197 level would open a way to 31451 but there’s a risk the increase in US core inflation isn’t priced in fully yet. Therefore, the 30973 support might give in, which would be likely to (eventually) take the market towards the lows of 29646 – 30128. Let’s see how it plays out.
DAX dropped down 2.4% and is now trading at levels (13039 – 13055) that acted as resistance earlier this month. This has slowed the index down (also the DJ at support helps). But the market created a bearish engulfing candle in the daily chart yesterday. This suggests more downside for the coming days. In today’s trading, DAX needs to hold the price levels above 13114 in order to gain some upside intraday momentum. Otherwise, the pressure will build against the 13039 – 13055 support range. The nearest key price levels for DAX are the 13039 – 13055 range, 13114, 13168 and 13225.
Gold dropped 1.3% and is now trying to reverse the down move. Buyers came in at 1697 and there are multiple inside bars in the 1h chart. This indicates the reversal attempt is on the way but traders need to be able to push the market above 1705 and then defend the levels above it. This would probably take the market to 1710 or so. A failure to break decisively above 1705 is likely to lead to gold breaking the 1697 support and would bring the 1691 support into play.
GBPUSD rallied to the 1.1730 T2 level I set (here) and collapsed in yesterday’s dollar buying. The pair is now trading below the 1.1531 resistance. The risk of more downside over the coming days is considerable. Today traders prepare to trade the producer prices report (PPI). The index is likely to give us more guidance on what is happening with the US inflation. So could get more trading opportunities (volatility) later on today. The nearest key price levels are 1.1460, 1.1481, 1.1531 and 1.1584. Btw, the UK CPI came in at 9.9% (10.0% expected, 10.1% prior). No significant impact on the pair.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The Federal Reserve||Fed hiked the target range again by 75bps (to 2.25%-2.5%). This was the fourth consecutive rate hike. The rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent.|
|Yields||The 10-week range in the US 10-year treasury yield has been from 2.516% to 3.498%.|
|Employment||The US economy added 258 thousand new jobs. June number was revised from 390K to +384K and the average hourly earnings increased 0.5% (month over month) vs 0.3% predicted by the analysts. Such strong growth in employment and earnings reminds us how strong the US economy still is.|
|Inflation||The US inflation rate dropped more than expected. The July reading (YoY) came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior.|
The Next Main Risk Events
- USD PPI
- USD Core PPI
- NZD GDP
- AUD Employment Change
- AUD Unemployment Rate
- USD Core Retail Sales
- USD Empire State Manufacturing Index
- USD Retail Sales
- USD Philly Fed Manufacturing Index
- USD Unemployment Claims
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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